Economic and investment environment: Challenges for financial planners

Given the skew movements in share prices in the economy, fear is likely to drive decisions of investors. It is here where the stabilising role of the financial planner becomes more important than ever.

Sound financial planning principals are now needed more than ever. In this regard the financial planner must:

1. Take note of the environment: Economically and politically.
2. Ensure that clients stay within their risk profile.
3. Manage clients' emotional roller coaster.

International

Though it was expected that world economic growth for 2008 and 2009 will be way below the highs of 4%-5% recorded over the past few years, such slowdown might be more severe than initially anticipated.

According to the International Monetary Fund (IMF) international economic growth of 3.7% in 2008 and 3.8% in 2009 is expected and there is a 25%chance that world economic growth may fall to below 3% this year.

South Africa

Unfortunately headlines are still and will for some time be dominated by the electricity and inflationary problems. A period of higher interest rates for longer would therefore seem to be in the offing. However, the longer term picture looks much brighter as the authorities are executing policy to tackle the problems.

Economic growth for the first quarter in 2008 is expected to show a dramatic slowdown from the 5.3% of the fourth quarter. Lower growth in especially the mining and consumer related sectors are expected, whilst construction and some investment related sectors should post reasonable growth rates.

Impact on sectors

Rising inflation and interest rates should have taken its toll on the retail- and financial services sectors. Retail sales are already down at the 2% growth level compared to 9% last year. And initial numbers show a sharp increase in bad debt numbers which must have affected the performance of the financial sector.

As in the case of mining, manufacturing will show a poor return due to amongst others load shedding and sharp increases in input costs. The Investec PMI for March pointed to negative growth in the manufacturing sector. However, the construction and transport sectors should have performed relatively well due to the country's infrastructure investment needs. As such economic growth might be stronger than currently expected by the market.

Tough, but not the toughest, times

Lower economic growth, high inflation and more pressure on interest rates seem to be the prospect until at least the end of the year. Consumers will feel the brunt of these difficult times. However, the current situation is not yet comparable to the difficult times of 1998 and 2002. In fact, consumers in general are in a better state to handle the situation as they now possess much stronger balance sheets. Rate increases will therefore not be a train smash.

Domestically the drivers of inflation are intensifying. These drivers are the petrol price, food prices, prices for clothing, and administered prices. In reaction, the Monetary Policy Committee (MPC) lifted the repo rate in April. It is expected that these inflation drivers will continue to push up the inflation rate for at least the next three to four months. Therefore one can expect that if the MPC will be consistent, the repo rate may increase with at least another 1%. Volatility due to uncertainty in the industrial, financial and property markets are likely to continue.